American Negotiators Get Ready to Hit the China Reset Button

American Negotiators – Time to Revisit Post-Crisis China

Get ready for a new wave of US-Chinese negotiation, but with decidedly different characteristics than in the past. Post-crisis China is more than race-to-the-bottom cost cutting.

Negotiating between US and Chinese business underwent a sea change after the 2007-8 financial crisis. Chinese negotiators become more confident and independent of international partners, while US and European actors shifted their focus inward and put China strategies on hold. For American SMEs (Small & Medium sized Enterprises) who delayed or cancelled China plans when things looked bleak at home, this might be a great time to take a fresh look.

The new “New China” – Race to the bottom is over (and manufacturers lost).

The new post-crisis China is more successful, more independent – and in some ways more mature. China’s massive stimulus package had a dual impact on the Chinese negotiating environment. On the one hand, China Inc. is more confident about its own abilities after weathering the global disruption in good form. In 2002, Chinese managers looked to the West for expertise and management know-how. In 2012 western models are looking suspect at best, and Chinese methods seem to work better – at least locally.

But Beijing’s stimulus had another result that western negotiators have to factor in to their strategies. Government bailouts focused on SOEs (State Owned Enterprises) and policy organs – particularly those in the interior of the country. As a result of the massive government spend, the state sector has made huge strides in wresting control of China’s economic development from entrepreneurs and private companies. As SOEs were getting the cash, privates were getting the shaft in the form of inflation. Prices soared and labor became scarcer. Chinese manufacturers have been hit with a deadly 1-2 punch of lower demand from stricken overseas markets and higher prices as home.

This has split China’s negotiating world in two. State owned & policy directed businesses have become tougher and more demanding, but private companies and entrepreneurs are ready to deal – if the terms and variables are right. Hint: Mainlanders with money (MWMs) want to take the money and get out of China. In the old days, successful entrepreneurs would send the kid to university and set up the wife with a green card while they stayed home and managed the factory. Post-crisis, they want to move the business overseas.

Pre-Dawn in America?

Americans have changed as well. After the financial crisis the first reaction at most firms was to entrench, pull back and hunker down. A few giant MNCs had the foresight and wherewithal to double down on China, and they reaped the benefits. Most, however, cut their China exposure, put expansion plans on hold and waited out the tough times. Now there are hopeful signs that the US economy is coming back to life – but it is not the same economy as in 2006. The American middle class has been devastated and is unlikely to come roaring back to its former buying power & glory any time soon (if ever). Stock markets are riding high again, which is great for board members and IPO zillionaires, but the housing market is still under water – destroying household income and spending power. Corporate coffers are full and the worst times are behind us, but businesses with products or services to sell have to start looking at China and the rest of Asia. Europe and Main Street America are simply not back to pre-crash levels.

US-China Negotiation in 2012: A Whole New Ball Game

1. China trade numbers are dropping. Either western markets are consuming less (possible) or they are sourcing from other places. Either way, Chinese producers are probably willing to renegotiate. Hint – forget about pure-price negotiations, which tend to favor the Chinese. It’s time for western negotiators to write up a new wish-list for their China deals. Look at ways to develop strategic relationships, quality assurance and serious access to markets and distribution channels. They need your market, you need theirs. It is time to start dovetailing differences and structuring creative solutions.

2. Chinese privates and successful entrepreneurs (i.e.: non-SOEs) are panicky and want out. Now is the time to for American related parties – downstream customers, marketing partners – to talk about ways for the Chinese to set up operations in the States. At the moment they are clueless newbies when trying to develop a US presence, but before long they will be serious competitors. Co-opt before you compete. Hint – Mainland Chinese are terrified of “China-bashing” in the US, so you have an advantage over their own network. They might be amenable to partnership that will help smooth their entry to the US – for the right terms.

3. Don’t ignore expats already doing business in China. With economic activity slowing, they may be ready to make interesting deals as well. Whether you are entering the China market, sourcing or filling in a global expansion plan, this might be your moment to leverage off the hard work and anxiety of people you already have connections with. Dig out those yearbooks (ok – Facebook friend lists) and get a dialogue going with other westerners who know the ropes.

4. For the first time in a decade, time is on your side. China has always been “hurry up and wait” for American SMEs – you were last in line when supplies were tight and put on hold when you wanted to set up your own operation. A jittery China Inc. is willing to deal, and successful Chinese entrepreneurs hear the clock ticking louder than you do.

5. Post-crisis China is more sophisticated, so they are more strategic. The days of “race to the bottom” cost cutting are over. Now it’s time for “race for the exit” expansion. Chinese businesses have more to offer – and for the first time they have serious money to spend. Time to get reacquainted with China if the last time you looked was in the pre-2007 manufacturing era.